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RBNZ wants to be able to ban baddies from finance companies & seeks powers to respond to distress signs, investigate & block dividends

RBNZ wants to be able to ban baddies from finance companies & seeks powers to respond to distress signs, investigate & block dividends

The Reserve Bank wants to be able to obtain court orders banning individuals from participating in non-bank deposit takers for up to five years.

This plan is included in a consultation paper on the regulatory requirements of the non-bank deposit taker (NBDT) regime, which includes finance companies, building societies and credit unions. The Reserve Bank is asking for submissions by November 5. The paper seeks comment on policy proposals for a second Bill to complete the legislative framework for the Reserve Bank’s regulation of the NBDT sector. The central bank expects the second Bill to be introduced to Parliament in the "early part" of 2011.

It says that, although the onus for ensuring directors and senior managers of NBDTs are fit to perform their duties will primarily sit with the companies shareholders and directors, it, as regulator of the sector, should have a secondary role. The Reserve Bank wants to have a role in ensuring those who don’t meet prescribed criteria are either not appointed, or can be removed from leadership positions at NBDTs. If a director or senior office holder meets certain “trigger” criteria, the directors won’t be allowed to appoint the person until they can confirm the Reserve Bank doesn’t object.

The trigger criteria could include bankruptcy, involvement with an entity that has gone into receivership, liquidation, voluntary administration or statutory management, criminal offending, disciplinary action or adverse findings by a professional or regulatory body, adverse findings or action from another regulatory authority, or conflicts of interest. These would be applicable to events both in New Zealand and overseas.

The Reserve Bank also says it wants to be able to review an appointment when it becomes aware of information about a person already appointed to a role, or may withdraw or revoke an appointment if someone is no longer a “fit and proper” person for the role.

“We are also proposing that the (Reserve) Bank should be able to apply to the Court for an order banning a person from participating in non-bank deposit taking business, for a maximum of five years,” the Reserve Bank says.

Long time coming

In June 2007 Cabinet agreed to a new framework for the regulation of NBDTs with the Reserve Bank as prudential regulator. The move came amid the collapse of dozens of finance companies putting billions of dollars of investors' money on the line. See our Deep Freeze List for full detail on the failed companies.

From December 1 NBDTs will be required to have a credit ratings from an approved rating agency, governance arrangements designed to ensure they give proper consideration to the interests of all stakeholders, risk management programmes outlining how they will identify and manage key risks such as credit and liquidity risk, minimum capital requirements included in trust deeds, and restrictions on a deposit taker’s related party exposure and liquidity provisions enabling them to withstand a plausible range of shocks. See more detail here.

The consultation paper notes the Reserve Bank also plans to ask Cabinet for the power to impose specific conditions on the granting of licences and de-licencing NBDTs. The Securities Commission, and Financial Markets Authority once it replaces the Securities Commission, plus NBDTs trustees should be able to recommend de-licencing for breaches of the Securities Act and trust deed provisions. And the Reserve Bank says it will consult with the Securities Commission, Companies Office and trustee before initiating the de-licencing of a NBDT.

Wants powers enabling it to respond to early signs of distress, investigate block dividend payouts & advise trustees on moratoriums

Meanwhile, the central bank also wants to have “appropriate powers” so it can respond to early signs of distress with its distress and failure management powers for registered banks extended to NBDTs. In particular, it wants powers to obtain information, investigate and give directions.

“At present the bank is unable to intervene, even where the failure of a NBDT threatens the soundness or efficiency of the financial system,” the consultation paper notes.

The Reserve Bank also wants powers enabling it to issue directions to NBDTs, associated persons of NBDTs and trustees. It says these are “fairly standard” prudential tools. Although it currently doesn’t have the ability to direct a NBDT or become involved if one poses a threat to financial stability, it does have such powers over banks and insurers.

“Directions could include to cease paying dividends, to remove directors, to cease raising funds, or to cease undertaking related party transactions,” the consultation paper says.

As for trustees, the Reserve Bank wants to be able to direct them to make changes to the trust deed or provide advise on the merits of a moratorium proposal.

“We intend to propose to Cabinet that trustees be required to obtain information from NBDTs when requested to do so by the (Reserve) Bank, provided the information requested relates to areas of trustee responsibility.”

* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.

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Well I suppose someone has to do the job of regulator, whoever was supposed to be doing it before obviously wouldn't or couldn't do it.